What You Shouldn’t Give

Daniel Gross argues that although gift cards can “signify a greater level of thought than cash,” purchasing one is “really making a free loan to big business”:

[L]ots of things could happen that would mean that the full amount of the gift isn’t used. In the retail trade, this is known as “breakage.” Breakage is a feature, not a bug, of the gift-card system, and it’s one of the most pernicious aspects of the trend. When balances aren’t used, they are simply pure profit for the retailer that sold the card. They get money upfront and never have to deliver any goods or services.

Even when recipients do use the full value of gift cards, retailers are still making out like bandits. Even in this age of low interest, idle money has value. When you buy a gift card, you are effectively making an interest-free loan to the company for the period until the card is redeemed – a week, a month, six months, a year. Large companies like Starbucks have very efficient treasury operations that sweep all available cash into interest-earning savings instruments. Cash is a resource like any other, and companies hate to see any resource go to waste.

Other drawbacks of playing it safe:

When we asked the gift givers to rate how much they expected recipients to enjoy the gift, and contrasted this with the actual level of enjoyment of the person getting the gift, we found three systematic biases:

  • First, gift receivers rated the gifts as more exciting than gift givers; in general, gift givers underestimated how much joy their gifts would bring.
  • Second, gift receivers preferred the riskier gift and wished that gift givers took more chances.
  • Finally, the underestimation of how much people would like the gifts was particularly large for risky gifts.